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MIDTERM STUDY GUIDE PT. 1 - Study Guide Economics Midterm...

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Study Guide Economics Midterm Part I Chapter 1- THINKING LIKE AN ECONOMIST Economics: The study of how people make choices under conditions of scarcity and of the results of those choices for society. Three Principles of Decision Marking 1. The Scarcity Principle 2. The Cost-Benefit Principle 3. The Incentive Principle 1.“Scarcity principle” - Scarce: When there isn’t a lot of something or isn’t always available. - Scarcity is an insufficient supply of something where “insufficient” mean “not enough to satisfy the desires of people.” o Example: Strawberries Fruits and vegetables are scarce in markets sometimes because those fruits and vegetable grow only at certain times of the year. - Although we have boundless needs and wants, the resources available to us are limited . So having more of one good thing usually means having less of another. In the he “Scarcity Principle”… - Your “Reservation Price” is the most you would pay to obtain a good or service. - Your “Surplus” in a transaction is the difference between your reservation price and what you actually pay. - Scarcity implies that decision makers face trade offs, that is they must give up something to get something else. o TRADE-OFFS = Choosing between two competing interests , therefore they must give up something to get something else . o Economists resolve such trade-offs by using…
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COST-BENEFIT ANALYSES!! 2. Cost-Benefit Analyses – an action should be taken if, and only if, its benefits exceed its costs . - All cost benefit principle really says is that a rational decision is one that is explicitly or implicitly based on weighing of costs and benefits . - The cost-benefit framework can lend structure to your thinking even when no relevant market data are available . *Example: Should you walk downtown to save $10 on a $25 computer game? o You can buy a game for $25 at the Ramp Shop or $15 at University Mall. You can buy a computer for $1000 at the Ram ship of $990 University Mall. Should you answer where to buy be the same or different for the two cases? A. Different because buying the game at U Mall provides a higher percent discount percent. B. The same bec MARGINAL COST V.S. MARGINAL BENEFIT Marginal Cost: The cost of doing little bit more of an activity Marginal Benefit: The benefit that derives from doing a little bit more of an activity. - To a decision maker, the relevant costs and benefits are marginal costs and marginal benefits where marginal means “incremental.” The Cost-Benefit Principle says: An individual should do more of an activity only if marginal benefits exceed marginal costs and only up to the point where the marginal benefit equals the marginal cost. - Most decisions involve choosing a little bit more or less of a good activity.
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